ANNUAL REPORT MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION CONSOLIDATED FINANCIAL STATEMENTS

Transcription

1 ANNUAL REPORT MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 DATED: MARCH 31, 2011

2 TABLE OF CONTENTS PRESIDENT S MESSAGE... 1 PART I Forward-Looking Disclaimer... 2 Explanation of Non-GAAP Measures Used in this Document... 2 Overview of the Business... 3 Business Environment... 3 Strategy... 4 PART II PERFORMANCE SUMMARY Key Performance Drivers and Indicators... 5 Property and Corporate Performance 2010 and Outlook PART III Summary of Annual Information Quarterly Performance Summary PART IV Operating Liquidity and Working Capital Capital Resources, Equity and Debt Activities Commitments and Contingent Liabilities PART V Risks and Uncertainties PART VI Related Party Transactions Disclosure Controls and Procedures and Internal Controls Over Financial Reporting Critical Accounting Policies Future Accounting Policies Additional Information Appendix A Properties of the Company Appendix B Fourth Quarter Financial Results CONSOLIDATED FINANCIAL STATEMENTS... 34

3 PRESIDENT S MESSAGE Fellow Shareholders: We are pleased to report our results for the year ended Our Company has continued its growth and improved the quality of its portfolio of properties. Plazacorp now derives 89.1% of its revenues from national retail chains, up from 88.6% in 2009 and increased occupancy levels to 97.8% up from 97.4%. Our geographically diversified and stable portfolio of properties delivers solid cash flow that has allowed Plazacorp to increase its annual dividend to per share for 2011, up from per share in This represents the eighth consecutive annual dividend increase. During the year ended 2010, 6 additional properties became income producing. This development activity grew the current portfolio to 107 properties. Our business continues to grow as we have 7 properties under development and 6 land assemblies in progress in These new development properties are representative of our investment strategy to develop assets leased to Canada s best retailers and grow our future cash flow. The dramatic improvement in the long term financing conditions in the second half of 2010 provided an opportunity for Plazacorp to borrow higher loan amounts than initially planned. The Company took advantage of the improved market conditions and Plazacorp placed $73.2 million of new long term financing in The replacement of lower cost short term debt has a short term negative impact; but secures historically low cost fixed-rate debt for long periods of time. These actions will lead to future stability and will enhance our ability to increase dividends in the future. Plazacorp issued $20.3 million of convertible debentures in 2010 to provide equity for its new developments. As part of our transition to International Financial Reporting Standards, Plazacorp will adopt the fair value method as a measure of its properties. As of January 1 st 2010, the application of fair value increases Plazacorp s properties and investments, by approximately 38%. The fair value was calculated using a weighted average capitalization rate of 8.2%. Capitalization rates have since fallen in a material fashion over the last 12 months and the fair value of Plazacorp s assets will increase accordingly. It is important to note that Plazacorp s fair value numbers do not account for a portfolio premium or for conditional development deals in Plazacorp s pipeline. Using fair value numbers, Plazacorp s debt-togross book value ratio goes from 61% to 54%. Going forward, Plazacorp leaves behind the effects of the 2009 recession that carried over into 2010 and will continue its profitable growth in Plazacorp maintains one of the lowest payout ratios (dividends versus FFO or AFFO) among its peers. The discipline of a low payout ratio is an important part of Plazacorp s business strategy. Very few Canadian public real estate entities offer the potent combination of a secure dividend stream and the ability to consistently grow its asset base by developing high quality new retail projects. I wish to thank everyone responsible for our success: our staff; our Board of Directors; our customers; and our Stakeholders. Sincerely, Michael Zakuta President and CEO Page 1 of 63

4 PART I FORWARD-LOOKING DISCLAIMER Management s Discussion and Analysis ( MD&A ) of the consolidated financial position and the results of operations of Plazacorp Retail Properties Ltd. (hereinafter referred to as Plazacorp or the Company ) for the year ended 2010 should be read in conjunction with the Company s Consolidated Financial Statements and the notes thereto for the years ended 2010 and 2009, along with the MD&A for the year ended 2009, including the section on Risks and Uncertainties. Historical results, including trends which might appear, should not be taken as indicative of future operations or results. Certain information contained in this MD&A contains forward-looking statements, based on the Company s estimates and assumptions, which are subject to risks and uncertainties. This may cause the actual results and performance of the Company to differ materially from the forward looking statements contained in this MD&A. Such factors include, but are not limited to, economic, capital market, and competitive real estate conditions. These forward-looking statements are made as of March 31, 2011 and Plazacorp assumes no obligation to update or revise them to reflect new events or circumstances, except for forward-looking information disclosed in a prior MD&A which, in light of intervening events, requires further explanation to avoid being misleading. This MD&A has been reviewed and approved by management of the Company and the Board of Directors. EXPLANATION OF NON-GAAP MEASURES USED IN THIS DOCUMENT Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is not a Canadian Generally Accepted Accounting Principle (GAAP) financial measure and is presented as management considers EBITDA to be one indicative measure of Plazacorp s operating performance. EBITDA, as calculated by Plazacorp, may not be comparable to similarly titled measures reported by other entities. Due to the significance of Plazacorp s real estate assets and the contractual nature of Plazacorp s revenues, EBITDA can be used to measure Plazacorp s ability to service debt, and fund capital needs. Management uses EBITDA to compute two ratios indicative of the financial strength of the Company. 1. Interest Coverage Ratio is defined as the multiple by which EBITDA exceeds interest costs which include amortization of finance costs. 2. Debt Service Coverage Ratio is defined as the multiple by which EBITDA exceeds the aggregate of interest costs plus periodic mortgage principal repayments. Funds From Operations (FFO) is an industry measure and its calculation is prescribed in publications of the Real Property Association of Canada (REALpac). FFO as calculated by Plazacorp may not be comparable to similar titled measures reported by other entities. FFO is an industry standard widely used for measuring operating performance and is exclusive of amortization, future income taxes and gains or losses on property dispositions. Plazacorp considers FFO a meaningful additional measure as it primarily rejects the assumption that the value of real estate investments diminish predictably over time. It more reliably shows the impact on operations of trends in occupancy levels, rental rates, net property operating income and interest costs compared to net income determined in accordance with GAAP. Adjusted Funds From Operations (AFFO) is an industry measure widely used to help evaluate dividend or distribution capacity. AFFO as calculated by Plazacorp may not be comparable to similar titled measures reported by other entities. AFFO primarily adjusts FFO for non-cash revenues, expenses and operating capital and leasing requirements that must be made merely to preserve the existing rental stream, referred to as maintenance capital expenditures. Most of these maintenance capital expenditures would normally be considered investing activities in the statement of cash flows. Capital expenditures which generate a new investment or revenue stream, such as the development of a new property or the construction of a new retail pad during property expansion or intensification would not be considered as maintenance capital expenditures and would not be included in determining AFFO. Net Property Operating Income (NOI) is an industry measure in widespread use. NOI as calculated by Plazacorp may not be comparable to similar titled measures reported by other entities. Plazacorp considers NOI a meaningful additional measure of operating performance of property assets, prior to financing considerations. Its calculation is total property revenue less total property operating costs, including operating ground rents. It is used primarily for performance comparison Page 2 of 63

5 of assets held over the entire reporting period of the financial statements and this MD&A. EBITDA, FFO, AFFO, and NOI are not defined by Canadian GAAP, and therefore should not be considered as alternatives to net income or cash flow from operating activities calculated in accordance with GAAP. Readers are advised that changes in operating factors which impact FFO and AFFO, with the principal exception of financing costs, directly affect EBITDA. OVERVIEW OF THE BUSINESS Plazacorp was incorporated on February 2, 1999 and commenced trading on the TSX Venture Exchange (PLZ) on July 30, On December 11, 2002 after receipt of shareholder and regulatory approval, Plazacorp filed articles of amendment to convert to a mutual fund corporation and retains that status. Headquartered in Fredericton, New Brunswick, Plazacorp acquires, develops and redevelops retail real estate throughout Atlantic Canada, Quebec and Ontario. The Company s portfolio as at 2010 includes interests in 107 properties totaling over 4.9 million square feet and additional lands held for development. These include properties directly held by Plazacorp, its subsidiaries and through joint ventures. For 2010, and during 2009, Plazacorp s growth was primarily created through the development of new real estate assets. As at 2010, the Company has $14.8 million committed to new development for Summary of Properties Number of Properties 2010 (1) Page 3 of 63 Gross Leasable Area (sq. ft.) 2010 (2) Number of Properties 2009 (1) Gross Leasable Area (sq. ft.) 2009 (2) Newfoundland and Labrador 9 601, ,239 New Brunswick 35 1,513, ,513,414 Nova Scotia 22 1,000, ,325 Ontario , ,602 Prince Edward Island 5 274, ,763 Quebec 23 1,283, ,127,928 Total 107 4,907, ,517,271 (1) Includes properties under development and non-consolidated investments. (2) At 100%, regardless of the Company s ownership interest in the properties. BUSINESS ENVIRONMENT The principal regions in which we operate continue to exhibit stability in retailer demand for space and in consumer spending. Our strategy is to develop properties tenanted by national retailers, and more importantly retailers in the consumer staples market segment. Our execution of this strategy has produced a portfolio that is 89.1% occupied by national retailers. This significantly enhances the stability of the cash flows from our portfolio. Yearly Dividend Growth Year (projected) Dividend per share annually Percentage increase 16.7% 19.0% 20.0% 16.7% 5.7% 4.1% 5.2% The capital markets had been volatile and challenging through much of 2009, but, financing of both debt and equity improved dramatically in Long-term debt financing is being underwritten more carefully, but is available to good borrowers with quality projects at historically competitive rates. Loan-to-value ratios have returned to 70-75% of the appraised market value of the underlying properties. Longer amortization periods and longer terms are also available. During the last year, the Company has been able to take advantage of the improvement in the long-term debt financing market. Our short-term development and operating facilities were renewed in This stability is a reflection of the Company s track record for developing and financing its assets under a variety of market conditions. The management team continues to be focused on producing high-quality developments for national retailers.

6 Over the last few years, Plazacorp has focused its growth on developments, partly as a result of a lack of supply of quality retail real estate for sale and the high prices demanded for that real estate. Plazacorp expects to continue driving growth through developments. STRATEGY Plazacorp s principal goal is to deliver a reliable and growing yield to shareholders from a diversified portfolio of retail properties. To achieve this goal the Company s Board of Directors has set acquisition criteria of a minimum cash yield (unlevered yield) equal to 100 basis points above the mortgage constant for a 10 year mortgage at prevailing rates over a 25 year amortization period. The Company strives to: maintain access to cost effective sources of debt and equity capital to finance the acquisition of new developments; acquire or develop properties at a price consistent with the Company s targeted returns on investment; maintain high occupancy rates on existing properties while sourcing tenants for properties under development and future acquisitions; and diligently manage its properties to ensure tenants are able to focus on their business. The Company invests in the following property types: development of new properties on behalf of existing clients or in response to demand; redevelopment of well located but significantly amortized shopping malls and strip plazas; and strategic financial investments in existing properties that will provide stable recurring cash flows with opportunity for growth. Management intends to achieve Plazacorp s goals by: acquiring or developing high quality properties with the potential for increases in future cash flows; focusing on property leasing, operations and delivering superior services to tenants; managing properties to maintain high occupancies; increasing rental rates when market conditions permit; managing debt to obtain both a low cost of debt and a staggered debt maturity profile; raising capital where required in the most cost effective manner; and periodically reviewing the portfolio to determine if opportunities exist to re-deploy equity from slow growth properties into higher growth investments. Page 4 of 63

7 PART II KEY PERFORMANCE DRIVERS AND INDICATORS There are numerous performance drivers, many beyond management s control, that affect Plazacorp s ability to achieve its goals. These key drivers can be divided into internal and external factors. Management believes that the key internal performance drivers are: Occupancy rates; Rental rates; Tenant service; and Maintaining competitive operating costs. Management believes that the key external performance drivers are: The availability of new properties for acquisitions and developments; The availability of equity and debt capital; and A stable retail market. The key performance indicators by which management measures Plazacorp s performance are as follows: Funds From Operations (FFO); Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA); Debt Service Ratios; Same-Asset Net Property Operating Income; Weighted Average Effective Cost of Debt; and Occupancy Levels. Page 5 of 63

8 The key performance indicators discussed throughout the MD&A are summarized below. For a detailed explanation of the key performance indicators please refer to the appropriate section in this MD&A. Management believes that its key performance indicators allow it to track progress towards the achievement of Plazacorp s primary goal of providing a steady and increasing cash flow to shareholders. The following chart discusses the key performance indicators for the year ended 2010 compared to the year ended Funds From Operations For the year ended 2010 FFO was $13.1 million or 26.4 per share (26.4 diluted) compared to $13.4 million or 27.9 per share (26.3 diluted) for the year ended 2009, a 2.6% decrease on a dollar basis and a 5.4% decrease on a basic per share basis. The principal factors influencing FFO were: Incremental NOI growth of $1.8 million earned by properties which were transferred from properties under development to income producing properties during 2009 and Same asset NOI growth of $554 thousand. An increase in short-term lending rates and standby fees, new debenture interest and the replacement of floating-rate debt with long-term debt on new properties decreased FFO by approximately $2.6 million. An increase in administrative costs of $205 thousand and a decrease in investment income of $186 thousand. The per share decrease in FFO is also attributed to an increase in the number of outstanding shares due to the exercising of options, conversions of convertible debentures and the dividend reinvestment plan. Earnings Before Interest, Taxes, Depreciation and Amortization For the year ended 2010 EBITDA was $30.6 million compared to $28.8 million for the year ended 2009, a 6.1% increase. The principal factors influencing EBITDA were: The full impact of earnings from the addition of new properties through development during 2009 and 2010 contributed $1.8 million. Growth in the same-asset pool resulted in an increase in EBITDA of $554 thousand. An increase in administrative costs of $205 thousand and a decrease in investment income of $186 thousand. Debt Service Ratios For the year ended 2010 the interest coverage ratio was 1.8 times down 0.2 times when compared to the year ended 2009 and the debt service coverage ratio was 1.5 times down 0.1 times when compared to the year ended The decrease in the interest coverage ratio was primarily due to higher floating rate interest costs on properties included in income producing properties, replacement of floating-rate debt with long term debt and an increase in debenture interest from the issuance of $20.3 million of debentures in The debt service ratios derived from EBITDA exceed the requirements under our borrowing arrangements. Same-Asset Net Property Operating Income For the year ended 2010 same-asset NOI increased compared to the prior year by $554 thousand or 2.1%. Excluding non-cash items and land rents, same-asset growth was 2.7%. This is primarily due to the lease-up at Belvedere Plaza, Grand Falls Shopping Centre and Plaza Royal. Weighted Average Effective Cost of Debt At 2010 the weighted average effective cost of mortgage debt decreased 4 basis points to 6.43% from 6.47% at Occupancy Levels At 2010 overall occupancy increased to 97.8% from 97.4% at Page 6 of 63

9 PROPERTY AND CORPORATE PERFORMANCE 2010 AND 2009 Funds From Operations (FFO) & Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA) Plazacorp s summary of EBITDA and FFO for the three and twelve months ended 2010, compared to the three and twelve months ended 2009 are presented below: 3 Months Ended Months Ended Months Ended Months Ended 2009 (000 s except per share amounts and debt coverage ratios) (unaudited) (unaudited) Total revenues $ 13,220 $ 13,233 $ 52,643 $ 49,784 Income before other comprehensive loss $ 1,325 $ 1,304 $ 2,561 $ 3,840 Add (deduct): (Gain) loss on disposal of income producing properties and surplus lands (117) 8 (133) (665) Gain on disposal of discontinued operation (777) - (777) - Income tax expense (97) (754) Income tax expense discontinued operation Amortization 2,670 2,834 10,549 10,274 Amortization discontinued operation Non-controlling interests Interest costs 4,362 4,174 17,187 14,566 Interest costs discontinued operation Earnings before interest, taxes, depreciation and amortization (EBITDA) 7,490 7,788 30,584 28,826 Add (deduct): Interest costs (4,369) (4,182) (17,219) (14,600) Current income tax expense (10) - (42) (44) Non-cash debenture interest Non-controlling interest adjustment to FFO (217) (459) (999) (1,319) Equity accounting adjustment to FFO Corporate amortization (4) (4) (17) (18) Basic FFO 3,092 3,330 13,078 13,432 Interest on dilutive convertible debentures before income tax Diluted FFO $ 3,092 $ 3,541 $ 13,078 $ 13,643 Basic Weighted Average Shares Outstanding 49,835 48,651 49,540 48,132 Diluted Shares Outstanding 49,841 52,488 49,544 51,935 Basic FFO per share $ $ $ $ Diluted FFO per share $ $ $ $ Earnings before interest, taxes, depreciation and amortization $ 7,490 $ 7,788 $ 30,584 $ 28,826 Interest costs $ 4,369 $ 4,182 $ 17,219 $ 14,600 Periodic mortgage principal repayments ,322 3,018 Total debt service $ 5,225 $ 4,998 $ 20,541 $ 17,618 Debt coverage ratios Interest coverage ratio 1.7 times 1.9 times 1.8 times 2.0 times Debt service coverage ratio 1.4 times 1.6 times 1.5 times 1.6 times Page 7 of 63

10 EBITDA increased by 6.1% year over year mainly as a result of incremental NOI growth from new development in the amount of $1.8 million and same-asset pool NOI growth of $554 thousand. This was partially offset by an increase in administrative expenses and a decrease in investment income. FFO year over year was affected by the same factors as EBITDA, as well as an increase in interest costs affected by higher short-term lending rates and standby fees, new debenture interest and the replacement of floating-rate debt with long-term debt on new properties. The increased interest costs of $2.6 million more than offset increases in NOI, causing a decline in FFO year over year. FFO per share was also affected by an increase in the number of shares outstanding due to the exercising of options, conversions of convertible debentures and the dividend reinvestment plan. Quarter over quarter, EBITDA and FFO decreased mainly as a result of a decline in investment income and an increase in administrative expenses. FFO quarter over quarter was also affected by increased interest costs due to the issuances of convertible debentures in the first quarter of 2010 and due to new mortgages financed throughout The decline in interest coverage and debt service coverage ratios year over year was mainly due to higher-floating rate interest costs on properties included in income producing properties, replacement of floating-rate debt with long-term debt and an increase in debenture interest from the issuance of $20.3 million of debentures in Quarter over quarter, the interest coverage and debt service coverage ratios also declined due to these reasons. Adjusted Funds from Operations (AFFO) Adjusted funds from operations removes non-cash revenues and expenses from FFO, deducts maintenance capital expenditures and makes other adjustments necessary to show funds available for distribution as dividends and to pay periodic mortgage repayments. Maintenance capital expenditures include leasing commissions, tenant improvement costs and routine capital expenditures for properties existing. 3 Months Ended Months Ended Months Ended Months Ended 2009 (000 s, except percentage data) (unaudited) Basic FFO $ 3,092 $ 3,330 $ 13,078 $ 13,432 Add: Amortization of finance charges included in interest expense , Principal repayment of tenant loans Non-controlling interest adjustment Corporate amortization Less: Non cash revenue straight-line rent (219) (112) (878) (1,111) Non cash revenue above and below market rent (18) (34) (70) (112) Equity accounting adjustment (57) (211) (153) (464) Maintenance capital expenditures (301) (226) (1,289) (1,456) Mortgage finance charges existing properties (88) - (296) (1) Basic AFFO $ 2,787 $ 3,095 $ 11,930 $ 11,604 Interest on dilutive convertible debentures Diluted AFFO $ 2,787 $ 3,306 $ 11,930 $ 11,815 Basic AFFO per share $ $ $ $ Diluted AFFO per share $ $ $ $ Gross dividend payments $ 2,392 $ 2,244 $ 9,521 $ 8,876 AFFO after dividends $ 395 $ 851 $ 2,409 $ 2,728 Dividends as a percentage of basic AFFO 85.8% 72.5% 79.8% 76.5% Dividends as a percentage of basic FFO 77.4% 67.4% 72.8% 66.1% For the year ended 2010, AFFO increased by $326 thousand or 2.8% over the prior year, mainly due to a decrease in maintenance capital expenditures at all of our consolidated properties and equity accounted entities, partly offset by a decrease in FFO. Page 8 of 63

11 For the quarter ended 2010 AFFO decreased by $308 thousand or 9.9% over the prior quarter mainly due to a decrease in FFO and an increase in maintenance capital expenditures incurred in the quarter due to timing of expenditures, partly offset by a decrease in maintenance capital expenditures incurred at our equity accounted entities. Same-Asset Net Property Operating Income Same-asset categorization refers to those properties which were owned and operated by Plazacorp for the year ended 2010 and the entire year ended 2009 and excludes partial year results from certain assets due to timing of acquisition, redevelopment or disposition. 3 Months Ended Months Ended Months Ended Months Ended 2009 (000 s, except percentage data) (unaudited) Same-asset rental revenue $ 11,581 $ 11,448 $ 46,112 $ 45,226 Same-asset operating expenses 2,513 2,559 9,932 10,189 Same-asset realty tax expense 2,293 2,176 9,130 8,541 Same-asset net property operating income $ 6,775 $ 6,713 $ 27,050 $ 26,496 Same-asset net property operating income excluding noncash revenue and land rent $ 7,168 $ 7,090 $ 28,741 $ 27,977 Same-asset net property operating income margin excluding non-cash revenue and land rent 61.9% 61.9% 62.3% 61.9% Total net property operating income $ 7,822 $ 7,785 $ 30,922 $ 28,771 Total net property operating income margin 59.6% 60.3% 60.0% 59.3% As noted in the chart above, the NOI for the same-asset pool is showing growth of $554 thousand for the year, due to the lease up at Belvedere Plaza, Grand Falls Shopping Centre and Plaza Royal which contributed $301 thousand to NOI. Sameasset NOI excluding non-cash revenue and land rent had growth of $764 thousand for the year, with the total NOI growing by $2.2 million due to the overall growth in income producing properties. Same-asset NOI and same-asset NOI excluding non-cash revenue and land rent increased by $62 thousand and by $78 thousand, respectively, for the quarter ended 2010 compared to the quarter ended 2009 mainly due to organic growth from leasing activity. The increase in total NOI for the year was attributable to: the full year impact of 8 properties transferred to income producing in 2009, accounting for $1.3 million of the increase (annualized impact to NOI of approximately $1.2 million, net of the effects of deconsolidations) and 6 properties transferred to income producing in 2010, accounting for $501 thousand of the increase (annualized impact to NOI of approximately $940 thousand, net of the effects of deconsolidations); Same-asset pool growth of $554 thousand; and partly offset by the sale of a 75% interest in 4 properties in 2009, and a 25% interest in a property in 2010, reducing NOI by $248 thousand. Total NOI increased by $37 thousand for the quarter ended 2010 compared to the quarter ended 2009 due to the impact of properties transferred to income producing in Page 9 of 63

12 The following assets are not included in same asset measurements due to timing of acquisition, redevelopment or disposition Transactions Property Type Square Footage Ownership Income Producing During Ottawa Street, Almonte, ON Single Use 18,365 25% Q1 10 Amherstview, Amherstview, ON Single Use 18,029 50% Q2 10 Scugog Street Port Perry, Port Perry, ON Single Use 16,776 50% Q2 10 Ville Marie Drive Plaza, Marystown, NL Single Use 14, % Q3 10 Jean Talon, Montreal, QC Single Use 6,000 35% Q3 10 Silver Fox, New Minas, NS Strip Plaza 42, % Q4 10 Terrace Dufferin, Valleyfield, QC Strip Plaza 17, % Disposition Q Transactions Property Type Square Footage Ownership Income Producing During Main and Sackville, Shediac, NB Single Use 23, % Q1 09 Hastings Street Bancroft, Bancroft, ON Single Use 17,538 25% Q2 09 Bedford Commons, Bedford, NS Strip Plaza 72, % Q2 09 Granite Drive Plaza, New Minas, NS Strip Plaza 83, % Q2 09 Shediac West, Shediac, NB Strip Plaza 65,842 10% Q3 09 Main Street Alexandria, Alexandria, ON Single Use 17,242 25% Q4 09 Miramichi West Plaza, Miramichi, NB Single Use 18, % Q4 09 Fairville Boulevard 2, Saint John, NB Strip Plaza 56, % Q4 09 Same-Asset Net Property Operating Income Excluding Non-Cash Revenue and Land Rent GAAP requires contractual rental revenue to be recorded on a straight-line basis over the term of the respective leases. With the exclusion of this non-cash revenue, one can see the growth in same-asset NOI being derived from changes in occupancy, cost containment and rental increases on lease renewal. Due to the Company s use of operating land leases, operating margins excluding ground rent are more representative of industry norms and compare favourably with other public real estate entities specializing in retail shopping plazas. Same-asset NOI margins were 58.7% for the year ended 2010 (year ended %). These margins increase to 62.3% (year ended %) when the effect of land rent and non-cash revenue is excluded. Significant portions of the Company s leases have common cost recoveries from tenants linked to the consumer price index (CPI). Certain anchor tenant leases may restrict recovery of common costs. As a result, certain costs such as snow removal and utility costs may not be completely offset by cost recoveries in a period, or recovery revenues may exceed costs. Municipal taxes are generally net and fully recoverable from all tenants. Most tenants in strip plazas and single-use properties are responsible for their own utilities, and changes to these costs do not materially impact on NOI. Significant fluctuations in the CPI index during 2008 and 2009 have restricted the growth during 2010 for certain tenants, constraining the growth of same-asset NOI. Page 10 of 63

13 Leasing and Occupancy The following table represents leases expiring for the next 5 years and thereafter for Plazacorp s property portfolio at 2010 (excluding non-consolidated investments). Strip Plazas Enclosed Malls Single-User Total Year Sq Ft (1) % Sq Ft (1) % Sq Ft (1) % Sq Ft (1) % , % 74, % , % , % 74, % 25, % 219, % , % 39, % , % , % 108, % , % , % 74, % 25, % 457, % Thereafter 1,211, % 266, % 478, % 1,956, % Subtotal 2,199, % 637, % 529, % 3,366, % Vacant 55,360 20, ,303 Total 2,255, , ,104 3,442,914 Weighted average lease term 7.6 years 6.6 years 11.2 years 8.0 years (1) At 100%, regardless of the Company s ownership interest in the properties. At 2010, overall occupancy for the portfolio (excluding properties under development and non-consolidated investments) increased to 97.8% from 97.4% at During 2010, the Company completed 872 thousand square feet ( thousand square feet) of new and renewal leasing deals at market rates (including leasing at non-consolidated investments). The 872 thousand square feet of leasing was comprised of 330 thousand square feet on new developments, and 542 thousand square feet on existing properties. Excluding leasing at non-consolidated investments, the Company completed 644 thousand square feet of new and renewal leasing deals ( thousand square feet) at market rates. The 644 thousand square feet of leasing was comprised of 270 thousand square feet on new developments and 374 thousand square feet on existing properties. On average, Plazacorp s embedded or contractual gross rents expiring in 2010 would be at or below current market rates. Plazacorp s financial exposure to vacancies and lease roll-overs differs among the different retail asset types, as gross rental rates differ dramatically by asset class. Occupancy in the strip plazas was 97.5% at 2010, compared to 97.0% at Average occupancy for enclosed malls was 96.8% at 2010, consistent with Occupancy for single use assets remained stable at 100% at Pre-leased space in properties under development and under construction is 56.6% at Plazacorp has built a portfolio with a high quality revenue stream. Plazacorp s ten largest tenants based upon current monthly gross rents at 2010 represent approximately 52.1% of total revenues in place. % of Gross Revenue % of Gross Revenue 1. Shoppers Drug Mart Bulk Barn Dollarama Michaels Staples Winners Mark s Work Wearhouse Sobeys Reitmans Future Shop 1.6 Page 11 of 63

14 The Company s mix of tenancy continues the trend towards primarily national tenants as a result of new developments. The portfolio is well positioned to resist downturns in our markets and provide stability to cash flows from which we fund operations and dividends National 89.1% 88.6% Regional 4.0% 4.6% Local 6.0% 5.9% Non-Retail 0.9% 0.9% Investment Income Investment income partly consists of income from equity and cost accounted investments. The following schedule shows our ownership position, rates of preferred returns on investment and our interest in cash on capital appreciation beyond the preferred returns. Ownership Position Preferred Return Residual Return Equity Accounted Investments (1) Centennial Plaza Limited Partnership 10% 10% 20% MDO Limited Partnership 20% 10% 30% Village Shopping Centre Limited Partnership 30% 8% 50% Trois Rivieres Limited Partnership 15% 10% 30% Plazacorp Shediac Limited Partnership 10% 8% 50% Plazacorp Ontario1 Limited Partnership 25% - - Cost Accounted Investments Northwest Plaza Commercial Trust 10% - - (1) Equity accounted investments consist of the following properties: Centennial Plaza, Marche De L Ouest, Place Du Marche, Plaza des Recollets, the Village Shopping Centre, Shediac West, Ottawa Street, Hastings Street Bancroft, and Main Street Alexandria. Investment income is made up of interest income ($227 thousand) generated primarily from tenant loans, the income reported on an equity accounting basis from the above-noted entities ($842 thousand) and income reported on a cost basis from Northwest Plaza Commercial Trust ($52 thousand). The $842 thousand of equity accounted investment income includes Plazacorp s share of NOI of approximately $2.9 million. The significant decline in investment income quarter over quarter, was mainly due to certain non-recurring adjustments of approximately $131 thousand. Gain (Loss) on Disposals of Income Producing Properties and Surplus Lands During the year ended 2010, the Company disposed of its interest in Terrace Dufferin located in Valleyfield, QC for net proceeds of $1.3 million and an accounting gain of $777 thousand (net of future income tax of $61 thousand). This amount has been classified as discontinued operations in the income statement. The Company also disposed of a 25% interest in a free standing Shoppers Drug Mart located in Perth, ON (Dufferin & Wilson (Perth)) for net proceeds of $464 thousand and an accounting gain of $16 thousand. The Company sold land in New Minas, NS for net proceeds of $127 thousand and an accounting gain of $117 thousand. During the year ended 2009, the Company disposed of a 75% interest in four income producing properties for net proceeds of $12.4 million and an accounting gain of $671 thousand. The purchaser assumed mortgages of $8.7 million resulting in net cash proceeds of $3.7 million. The Company also disposed of surplus land for net proceeds of $2.8 million with an accounting loss of $6 thousand. Page 12 of 63

15 Income Tax Expense The financial statements include the current and future income taxes payable by the Company and its consolidated subsidiaries. All current income taxes are those of subsidiaries. As a mutual fund corporation, the Company does not provide for current taxes on realized capital gains. 3 Months Ended 2010 (unaudited) 3 Months Ended 2009 (unaudited) 12 Months Ended Months Ended 2009 (000 s) Current income taxes (recovery) $ 10 $ (1) $ 42 $ 44 Future income taxes (recovery) (107) (753) Total income taxes (recovery) $ (97) $ (754) $ 653 $ 89 The future income tax expense has increased quarter over quarter and year over year due to a change in the provincial tax rate which was effective in Administrative Expenses Administrative expenses increased by $205 thousand over the prior year, mainly due to additional consulting and professional fees relating to special tax and International Financial Reporting Standards ( IFRS ) consulting of $112 thousand, as well as the corporate management fee of ¾% of gross rents paid in the preceding fiscal year. This fee under the management agreement between Plaza Group Management Limited and Plazacorp was effective March 30, This increase in the corporate management fee was offset by a reduction in property management fees which is reflected in NOI. For the year ended 2010, the total corporate management fees were $365 thousand ( 2009 $260 thousand). For the quarter ended 2010, there was an increase in administrative expenses over the prior year of $79 thousand. This increase is mainly due to consulting and professional fees of $71 thousand relating to special tax and IFRS consulting, mentioned above. The Company expects to spend an additional $100 to $150 thousand in incremental consulting expenses relating to IFRS in OUTLOOK Our development and leasing efforts have produced a property portfolio that is dominated by national retailers and provides our investors with a very stable cash flow. Performance to date has demonstrated the strength of current strategies and operating capabilities. Barring unforeseen events, management is confident of delivering solid performance in 2011 as well as growth to the portfolio. The primary benefit to shareholders of the Company s performance and tenant profile is reliable cash flow and, over time, increasing dividends. Plazacorp s current dividend policy is to pay shareholders per share for 2011 compared to per share for In the short-term, Plazacorp foresees most of its growth being derived from development activity. The following properties are under active development or active planning and are anticipated to become income producing at various points over the next two years as follows: Properties under development Property Type Square Footage Ownership Income Producing 90 Blvd. Tache Ouest, Montmagny, QC In Planning - 50% - Magog, Magog, QC Strip Plaza 75,000 50% - Bedford Commons 2, Bedford, NS Strip Plaza 103, % Q3 11 Commercial Street Plaza 2, New Minas, NS Strip Plaza - 100% - King & Mill, Newcastle, ON Single Use 15,051 50% Q1 11 Stavanger Drive, St. John s, NL Strip Plaza 49,600 90% Q3 11 Torbay & MacDonald, St. John s, NL Single Use 18, % Q1 11 There are six other conditional land assemblies which are under purchase agreements and subject to due diligence which would represent 248 thousand additional square feet at completion. Subsequent to year end one of the conditional land assemblies closed. This land purchase represents 40 thousand of the 248 thousand square feet expected on completion. Page 13 of 63

16 The Company is looking at the possibility of converting from a mutual fund corporation to a real estate investment trust (REIT) structure. The Company believes that a REIT structure could be beneficial for existing shareholders. No assurances can be given that this will occur and any contemplated conversion will require many approvals including tax and other regulatory, Board and shareholder approvals. PART III SUMMARY OF SELECTED ANNUAL INFORMATION Plazacorp s summary of selected annual information for the last three fiscal years ended are presented below: (000 s except per share, percentages and number of properties data) Total revenue $ 52,643 $ 49,784 $ 47,182 Income before other comprehensive loss $ 2,561 $ 3,840 $ 5,951 Income and other comprehensive loss $ 2,518 $ 3,840 $ 5,951 Dividends per share Earnings per share basic Earnings per share diluted FFO per share basic FFO per share diluted Dividends as a percentage of basic FFO 72.8% 66.1% 66.6% Dividends as a percentage of basic AFFO 79.8% 76.5% 75.4% Total assets $ 317,136 $ 308,927 $ 291,558 Total mortgages, bonds, debentures, notes, liabilities held for sale and bank indebtedness $ 274,022 $ 261,169 $ 244,239 Basic weighted average shares outstanding 49,540 48,132 46,746 Properties under development Income producing properties (including non-consolidated investments) Total properties in portfolio Rentable Sq Ft.(at 100% and excluding investment properties and properties under development) Strip Plazas 2,255 2,206 2,003 Enclosed Malls Single Use Total income producing properties 3,443 3,355 3,076 Occupancy % (excluding investment properties and properties under development) Strip Plazas Enclosed Malls Single Use Total income producing properties The summary of yearly results is influenced by significant acquisition, development and re-development activities over the three years and is reflected in the increasing total assets and revenues. Similarly, mortgage and bank debt reflects financing activities relating to both asset additions and ongoing financing activities for the existing portfolio. Fluctuations in income and assets are also caused by asset dispositions with a reduction in associated revenues and the recording of related gains or losses. The following gains on income producing properties and surplus land dispositions are included in income in the above chart: year ended $971 thousand; year ended $665 thousand; and year ended $4.1 million. Comparative figures are affected by changes in GAAP. The selected comparative information has not been restated for changes in GAAP, except for funds from operations per share basic and diluted and adjusted funds from operations per share basic and diluted. Page 14 of 63

17 SUMMARY OF SELECTED QUARTERLY INFORMATION Plazacorp s summary of selected quarterly information for the last eight quarters is presented below: (000 s except per share, percentage and number of properties data) (unaudited) Q4 10 Q3 10 Q2 10 Q1 10 Q4 09 Q3 09 Q2 09 Q1 09 Total revenue $ 13,220 $ 13,367 $ 12,853 $ 13,203 $ 13,233 $ 12,489 $ 12,178 $ 11,885 Income before other comprehensive loss $ 1,325 $ 599 $ 281 $ 356 $ 1,304 $ 755 $ 708 $ 1,073 Income and other comprehensive loss $ 1,505 $ 376 $ 281 $ 356 $ 1,304 $ 755 $ 708 $ 1,073 Dividends per share Earnings per share - basic Earnings per share - diluted Funds from operations per share- basic Funds from operations per share- diluted Dividends as a percentage of basic FFO 77.4% 65.4% 76.7% 73.1% 67.4% 60.5% 67.7% 69.6% Dividends as a percentage of basic AFFO 85.8% 66.9% 87.2% 83.1% 72.5% 71.4% 90.8% 74.2% Total assets $317,136 $308,023 $304,934 $309,616 $308,927 $306,478 $297,705 $291,576 Total mortgages, bonds, debentures, notes, and bank indebtedness $274,022 $265,305 $260,205 $258,626 $261,169 $257,189 $247,817 $239,888 Basic weighted average shares outstanding 49,835 49,611 49,463 49,242 48,651 48,251 47,983 47,628 Properties under development Income producing properties (including non-consolidated investments) Total properties in portfolio Rentable Sq. Ft. (at 100% and excluding investment properties and properties under development) Strip Plazas 2,255 2,250 2,247 2,227 2,206 2,222 2,145 2,007 Enclosed Malls Single Use Total income producing properties 3,443 3,427 3,457 3,401 3,355 3,336 3,259 3,104 Occupancy % (excluding investment properties and properties under development) Strip Plazas Enclosed Malls Single Use Total income producing properties The summary of quarterly information highlights generally increasing gross revenues and income. During the last eight quarters occupancy has been very steady which contributes to stability of cash flow. Many of the Company s leases are tied to a CPI cost recovery formula (57.2%). As well, anchor tenant leases may restrict Common Area Maintenance (CAM) cost recoveries. As a result of both of these factors, seasonal fluctuations in income and funds from operations occur primarily due to winter costs and yearly repair and maintenance activities which typically occur in spring and early summer which the Company cannot fully recover from tenants. Fluctuations in income and assets are also caused by asset dispositions with a reduction in associated revenues and the recording of related gains or losses. The following gains (losses) on income producing properties and surplus land dispositions are included in income in the above chart: Quarter $954 thousand; Quarter nil; Quarter $4 thousand; Quarter $13 thousand; Quarter ($8) thousand; Quarter ($30) thousand; Quarter ($19) thousand; Quarter $722 thousand. Comparative figures are affected by changes in GAAP. The selected comparative information has not been restated for changes in GAAP, except for funds from operations per share basic and diluted and AFFO per share basic and diluted. Page 15 of 63

18 PART IV OPERATING LIQUIDITY AND WORKING CAPITAL Cash flow, in the form of recurring rent generated from the portfolio, represents the primary source of liquidity to service debt including recurring monthly amortization of mortgage debt, to pay operating, leasing and property tax costs, and to fund dividends. Costs of development activity are funded by a combination of debt, equity and operating cash flow. Cash flow from operations is dependent upon occupancy levels of properties owned, rental rates achieved, effective collection of rents, and efficiencies in operations as well as other factors. Plazacorp s cash distribution policy reflects repayment of recurring mortgage principal payments from cash flow in determining cash available for distribution. Accordingly, the overall debt level on existing properties is reduced year-overyear. New debt or equity capital raised is generally directed to continuing development activities, which are discretionary, based on the availability of such capital. During 2009 the Company took advantage of opportunities to enter into joint venture arrangements which raised capital through the partial sale of assets. CAPITAL RESOURCES, EQUITY AND DEBT ACTIVITIES Operating and Development Facilities (000 s) $7.5 Million Operating $25.0 Million Development $9.9 Million Development $9.6 Million Development $15.0 Million Development $9.4 Million Development 2009 $ - $ 12,116 $ 8,270 $ 7,192 $ 9,894 $ 9,074 Net change - (8,129) (8,270) (7,192) (9,894) (9,074) 2010 $ - $ 3,987 $ - $ - $ - $ - Interest rate Prime % Prime % Prime % Prime % Prime % Prime % Maturity November 30, 2011 July 31, 2011 Discharged Discharged July 31, 2011 Discharged Security First charges on pledged property First charges on pledged property First charges on pledged property Other terms Debt service, interest coverage, occupancy & equity maintenance covenants Debt service, occupancy, leverage & equity maintenance covenants Debt service, interest coverage, occupancy & equity maintenance covenants Line reservations available for lettersof-credit $2.0 million $1.5 million - - $500 thousand - Issued and outstanding $514 thousand Funding is secured by first mortgage charges on properties. The Company must maintain certain financial ratios to comply with the facilities. These covenants include loan-to-value, debt service coverage, maximum leverage, interest coverage, occupancy and shareholder equity thresholds. The Company has an additional $500 thousand letter-of-credit facility maturing September 30, 2011 with a Canadian chartered bank, secured by Personal Property Security Act (PPSA) charges in various provinces. These letters-of-credit are issued to facilitate municipal planning deposit requirements for the Company s developments. This line was fully drawn at A Company subsidiary also has a $150 thousand unsecured operating line with a Canadian chartered bank upon which no funds were drawn at As of 2010, all debt covenants in respect of the above facilities have been maintained. Page 16 of 63

19 The above short-term financings relating to the $25.0 million and $15.0 million bank facilities which matured July 31, 2010 were renewed and extended for one year. The $9.9 million bank facility was converted to long-term debt in July, At 2010, the maximum amount available to be drawn on the $7.5 million operating line was $5.3 million. The amount available to be drawn fluctuates depending on specific assets pledged (to a maximum of $7.5 million). Subsequent to year end another property was added to the security of that operating line, increasing the current maximum amount available to be drawn to $6.1 million. Debentures and Mortgage Bonds Mortgage bonds are required to be secured by either property or cash. Mortgage bonds can be deployed up to 90% of the cost of a property under a first or second charge on that property. If it is a second charge, the total debt, including mortgage bonds cannot exceed 90%. Mortgage bonds are re-allocated to different properties from time to time as required. Series II mortgage bonds of $10 million fully matured in Of this maturing amount, $5.9 million were converted to Series VI convertible debentures and $4.1 million were repaid. During the year ended 2010, $20.3 million in Series VI convertible debentures, bearing interest of 7.5% per annum, were issued. The debentures are convertible into Plazacorp common shares at the option of the holder at $3.80 per common share and mature on March 31, Holders of $1.0 million of Series VI convertible debentures exercised their option to convert to 263 thousand common shares. Non-convertible debentures in the amount of $3.0 million were converted to Series VI convertible debentures during 2010 and $2.1 million matured and were repaid. Subsequent to year end $243 thousand in Series IV convertible debentures were converted to approximately 61 thousand shares, $110 thousand in Series V convertible debentures were converted to approximately 32 thousand shares and $430 thousand in Series VI convertible debentures were converted to approximately 113 thousand shares. On February 24, 2011, the Company issued $900 thousand of mortgage bonds, secured by a property, with a five year term and bearing interest of 5.25% per annum. Mortgages Fixed-rate mortgages in the amount of $6.6 million matured and were refinanced during the year ended 2010 for total proceeds of $9.7 million at a weighted average interest rate of 6.0% compared to the weighted average maturing interest rate of 6.8%. New long-term mortgages were entered into for a total of $73.2 million with an average interest rate of 5.9% and an average term of 9.2 years. A fixed-rate loan of $1.4 million that bore interest at 8.0% was repaid upon maturity in November 2010 and not refinanced. Subsequent to year end, long-term financing was obtained for the Village Shopping Centre located in St. John s, NL, in the amount of $22.5 million with a ten year term and an interest rate of 5.5%. Plazacorp owns 30% of the limited partnership which owns this property. As well, the Company renewed long-term financing for a property in Quebec subsequent to year end, in the amount of $1.3 million with a five year term and an interest rate of 4.4%. The Company s strategy is to balance maturities and terms on new debt with existing debt maturities to minimize maturity exposure in any one year and to reduce overall interest costs. Maintaining or improving the average cost of debt will be dependent on capital market conditions at the time of refinancing. Plazacorp s debt strategy involves maximizing the term of long-term debt available based on the tenant profiles for the assets being financed, at current market rates, in order to stabilize cash flow available for reinvestment and dividend payments. The Company s use of floating-rate debt has generally been limited to assets under development or redevelopment. At 2010, fixed-rate debt represents 98.3% of mortgages placed on income producing properties and floating-rate debt is restricted to assets under development and redevelopment. Management is of the view that such a strategy results in the most conservative interest rate risk management practice. Current maximum market parameters for conventional mortgage debt are in the range of 70% - 75% of the appraised market value of the underlying property, depending upon the particular features and quality of the underlying assets being financed. Page 17 of 63